The Democratic race

In Obama's grasp

Barack Obama looks all but certain to be the Democratic nominee

BARACK OBAMA once said that of the three contests in Pennsylvania, North Carolina and Indiana, the last would be the “tie-breaker”. He was right. His Democratic presidential rival, Hillary Clinton, won the first. He won the second on Tuesday May 6th, romping home in North Carolina with 56.2% to Mrs Clinton’s 41.5%. The margin of victory, nearly 15 points, was much larger than had been expected. As for the tie-breaker, Mrs Clinton won in Indiana, but by such a small margin (50.9% to 49.1%), that it all but counts as a victory for Mr Obama.

Thus it looks most likely that Mr Obama will be the Democratic nominee. Indeed some expect Mrs Clinton to withdraw from the race in the coming days. Mrs Clinton needed a much stronger victory than she got on Tuesday to persuade the party-insider “superdelegates” to swing behind her. Besides the delegate haul for Mr Obama from Tuesday, he won in the important game of expectations.

After Tuesday, Mr Obama’s lead in elected delegates cannot remotely be overturned by Mrs Clinton in the six remaining primaries (Kentucky, West Virginia, Oregon, South Dakota, Montana and Puerto Rico, none with big populations). Nor, in an unofficial but symbolic matter, could Mrs Clinton in any likely scenario overtake him in the overall popular vote.

Mr Obama’s lead is such that he could now even consider letting Florida and Michigan send delegates to the party convention. The two states voted earlier than Democratic rules allowed. This caused the party to strip them of representation at the nominating convention. Mr Obama took his name off the Michigan ballot as a result, and Mrs Clinton won both states, as nobody campaigned in either. For months, her campaign has insisted that those states’ delegations must be seated. Now Mr Obama might agree that they indeed could be seated in some form, as it appears that they could not overturn his now unshakeable lead in the pledged delegate count.

Mr Obama still needs the superdelegates to put him over the edge. But barring some new spectacular revelation about him, this is just a matter of time. Tuesday night’s results will probably mean that the recent trickle of superdelegates in his direction will become a fuller flow.

Some doubts may remain about Mr Obama’s electability against John McCain, but this result is undeniably a good one for the senator from Illinois. Mr Obama endured one of the worst weeks of his campaign, as his raving, anti-American former pastor, Jeremiah Wright, appeared before the press repeatedly and reiterated a number of his loonier comments (that the American government might have, for example, invented AIDS). Mr Obama finally denounced Mr Wright and, unlike in his broader speech about race a month previously, sharply distanced himself from the man. The story continued to dog him. That Mr Obama triumphed during such a personal nadir may convince many superdelegates that he is tougher than he appears. Mrs Clinton appears to be out of arguments about who can withstand Republican attacks come November.

The race is close to over. If Mrs Clinton chooses to drag it out, it is hard to see how she could continue later than May 20th. By then, three more states will have voted: Kentucky, West Virginia and Oregon. The first two are strong for her, the last for him, but they are all too small to matter now. Whenever Mrs Clinton decides to bow out, expect Mr Obama and Mr McCain now to begin campaigning as though autumn’s general election has truly begun.

U.S. Worker Productivity Increases More Than Forecast (Update2)

May 7 (Bloomberg) -- U.S. worker productivity unexpectedly accelerated in the first quarter as cuts in jobs and hours left fewer employees to do more, helping combat inflation.

Productivity, a measure of efficiency, rose at a 2.2 percent annual rate after a 1.8 percent gain the fourth quarter, the Labor Department said today in Washington. Labor costs climbed at a 2.2 percent pace, down from a 2.8 percent increase in the last three months of 2007.

Slowing sales and soaring expenses for raw materials like fuel prompted companies to trim staff hours by the most in five years last quarter. The weakening job market will probably keep a lid on increases in pay, indicating there is little risk that escalating wages will boost inflation.

``Because of the downturn in the economy, firms are relying more on productivity than increased labor for output,'' said Jonathan Basile, an economist at Credit Suisse Holdings Inc. in New York. ``This is constructive for the inflation picture.''

After the report, U.S. stocks were little changed and the dollar stayed higher against the euro. The dollar increased 0.8 percent to $1.5403 against the euro at 9:31 a.m. in New York, from $1.5533 yesterday, and the Standard & Poor's 500 Index opened down 1 to 1,417.3.

Economists forecast productivity would rise at a 1.5 percent annual pace, according to the median of 69 projections in a Bloomberg News survey. Estimates ranged from gains of 0.5 percent to 2.5 percent.

Slowing Growth

Unit labor costs, which are adjusted for the changes in efficiency, were forecast to rise 2.6 percent, according to the Bloomberg News survey. Estimates ranged from gains of 1.5 percent to 4.5 percent.

Productivity measures how much an employee produces for each hour of work. Generally, as the economy slows, companies pull back production, hiring and other spending to try to boost efficiency and lower costs.

The U.S. economy expanded at a 0.6 percent annual pace the first three months of this year. Over the past two quarters, the pace of growth has been the weakest since the final six months of 2001, when the economy was in a recession.

Hours worked dropped at a 1.8 percent pace, the most since the first quarter of 2003, today's report showed.

U.S. employers cut payrolls in each of the last four months, bringing the total number of jobs lost this year to 260,000.

Compared with the same period last year, productivity rose 3.2 percent, the biggest gain in almost four years.

Labor Costs

Unit labor costs, which reflect the gain in efficiency, were up 0.2 percent compared with a year earlier, the least since the second quarter of 2004.

Compensation for each hour worked increased at an annual rate of 4.4 percent in the first quarter, compared with 4.6 percent the final three months of 2007, today's report showed.

Adjusted for inflation, hourly pay decreased 0.7 percent in the year ended in March, the weakest performance in almost 13 years. That is one reason economists are forecasting consumer spending, which accounts for more than two-thirds of the economy, will slow in coming months.

A Labor Department report last week signaled the slowing job market is subduing wages. Average hourly earnings rose 0.1 percent in April, the least in six months, the government said.

Smaller increases in wages, which account for about two- thirds of the cost of producing a good or a service, would reduce inflationary pressures. Some Federal Reserve policy makers have said they are concerned increases in food and fuel costs will boost other prices.

Fed Rate Cuts

The central bank's Federal Open Market Committee on April 30 lowered the target for the overnight lending rate between banks by a quarter point, to 2 percent. In the text accompanying its announcement, the Fed said uncertainty about prices ``remains high'' though it projects inflation will ``moderate in coming quarters.''

Productivity at non-financial corporations, a measure watched by former Fed Chairman Alan Greenspan and other policy makers, increased at a 1.8 percent rate in the fourth quarter. These figures are released with a one-quarter lag.

In the late 1990s, Greenspan was one of the first to recognize that the increased use of computers and the Internet were helping to boost productivity, and that the improvement could help contain inflation even as the economy strengthened and unemployment remained low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999.

``As long as corporate profit margins can be somewhat sustained or at least cushioned by the increase in productivity that is a good sign,'' Russell Price, senior economist at H&R Block Financial Advisors Ltd. in Detroit, said in an interview with Bloomberg Television.

Productivity, Profits

Electronic Data Systems Corp., the world's second-biggest computer-services provider, last month reported first-quarter profit that beat estimates as contract signings soared 66 percent. Productivity improvements, such as reducing facilities that store client data, helped lift earnings by 2 cents a share.

Chief Executive Officer Ronald Rittenmeyer is firing workers and moving jobs to lower-cost labor markets such as India to reduce spending and attract more clients with lower prices. While a slowing U.S. economy has forced some clients to reduce spending on small projects, especially in the manufacturing and consumer-products industries, other customers are spending more, Rittenmeyer said.

``It's slower, and I think we've seen some projects just take a little bit longer to get booked out,'' he told analysts on an April 24 conference call. ``We haven't felt as much pressure as I was worried about.''

Among manufacturers, productivity rose at a 4.1 percent pace from January through March following a 4.2 percent gain in the fourth quarter.

Pending Sales of Existing Homes in U.S. Decreased 1% (Update1)

May 7 (Bloomberg) -- Fewer Americans signed contracts to buy previously owned homes in March for the second consecutive month as falling prices and tougher loan rules discouraged buyers.

The index of pending home resales fell 1 percent to 83, following a 2.8 percent drop in February that was larger than previously reported, the National Association of Realtors said today in Washington. The decline matched the median forecast of economists surveyed by Bloomberg News.

The glut of unsold properties is driving down home values, while rising defaults on subprime mortgages have prompted lenders to restrict access to credit, representing more hurdles for buyers. The slump in residential real estate may persist for much of the year, hurting economic growth.

``Sales are continuing to fall and I think it's largely because buyers are expecting prices to continue to fall,'' Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York, said in a Bloomberg Television interview. Sales will ``continue to fall probably though mid-summer.'' Lehman correctly forecast the decline.

Economists projected pending sales to fall 1 percent after an originally reported decline of 1.9 percent the prior month, according to the median of 30 forecasts in a Bloomberg News survey of economists. Estimates ranged from a drop of 4 percent to an increase of 1 percent.

Productivity Accelerates

Earlier today, a report from the Labor Department showed U.S. worker productivity in the first quarter unexpectedly accelerated as companies cut payrolls and hours worked to reduce costs during the weakest pace of economic growth in seven years. Productivity, a measure of efficiency, rose at a 2.2 percent annual rate, and labor costs climbed at a 2.2 percent pace.

U.S. stock prices remained lower following the reports and yields on Treasury securities were little changed. The Standard & Poors' 500 Index was down 0.3 percent at 1,414.3 at 10:05 a.m. in New York.

Pending resales decreased 20 percent from March 2007, today's report showed.

The Realtors' data on pending sales go back to January 2001, and the group started publishing the index in March of 2005.

The pending resales index is considered a leading indicator because it tracks contract signings. The existing-home sales report reflects closings, which typically occur a month or two later.

Regional Breakdown

Pending resales decreased in three of four regions. They dropped 10.4 percent in the Midwest, 1.4 percent in the West and 0.1 percent in the South. Pending resales jumped 12.5 percent in the Northeast.

The pending-sales index is based on a sample of 20 percent of transactions in the multiple listing service used by real estate agents, while the existing-home sales report covers about 40 percent.

Harvard University economist Martin Feldstein said yesterday the economy is ``sliding into a recession,'' and cited a sharper downturn in housing as the biggest risk. Feldstein is also president of the National Bureau of Economic Research, the group that charts when recession begin and end.

``Everything hinges on what's going to happen to house prices,'' and ``therefore the whole credit crunch,'' Feldstein said in a Bloomberg Television interview. Home prices will ``come down somewhat more.''

Scared Away

Buyers are probably being put off by falling prices. Home values fell 7.7 percent in the first quarter to the lowest level in almost three years, according to Zillow.com, an online real estate data provider. Zillow also estimates that almost 52 percent of owners who bought homes in 2006 now owe more on their property than it is worth.

Access to credit is also shrinking. The share of banks making it tougher for companies and consumers to borrow approached a record in the past three months, according to the Federal Reserve's quarterly survey of senior loan officers issued this week.

Federal Reserve Chairman Ben S. Bernanke in a speech this week urged the government and mortgage lenders to intensify efforts to avoid foreclosures.

D.R. Horton Inc. yesterday reported a record loss as orders slumped and it was forced to write down $834.1 million of land and inventory. The company cut its quarterly dividend by half.

``Conditions in the homebuilding industry remain challenging,'' Chairman Donald Horton said in a statement.

The fallout from the housing downturn is spreading. The world's biggest banks and securities firms cut a combined 65,000 jobs in the past 10 months as mortgage losses and writedowns for financial institutions reached $319 billion, according to Bloomberg calculations.

U.S. Stocks Decline on Housing Concern, Drop in Metal Prices

May 7 (Bloomberg) -- U.S. stocks fell for the second day this week as retreating metals prices and declining home sales overshadowed an unexpected acceleration in worker productivity.

Fannie Mae and Freddie Mac, the two biggest mortgage- finance companies, slumped after the National Association of Realtors said fewer Americans signed contracts to buy previously owned homes in March. Freeport-McMoRan Copper & Gold Inc. and Barrick Gold Corp. slid as a stronger dollar reduced the appeal of precious metals. AT&T Inc. and Verizon Communications Inc. dropped after rival Sprint Nextel Corp. won an agreement to build a next-generation wireless network.

The Standard & Poor's 500 Index slipped 2.47 points, or 0.2 percent, to 1,415.79 at 10:19 a.m. in New York. The Dow Jones Industrial Average lost 19.3, or 0.2 percent, to 13,001.53. The Nasdaq Composite Index increased 3.12 to 2,486.43. About four stocks dropped for every three that rose on the New York Stock Exchange.

``Economic worries are still at the forefront of people's minds,'' said John Forelli, who helps oversee $7 billion at Independence Investments LLC in Boston.

Financial shares contributed the most to the market's decline today as concern that the Federal Reserve may raise rates also weighed on the group. Fed Bank of Kansas City President Thomas Hoenig said ``serious'' inflation pressures may compel the central bank to increase borrowing cost.

Freeport-McMoRan lost $1.46 to $115.85. Barrick retreated 0.9 percent to $39.02. Gold fell 0.7 percent to $870.53 an ounce in London as the dollar rose against the euro.

Fannie, Freddie

Fannie Mae retreated $1.51, or 4.9 percent, to $29.30. Freddie Mac lost 94 cents to $26.39. The S&P 500 Financials Index retreated 0.6 percent.

The index of pending home resales fell 1 percent to 83, following a 2.8 percent drop in February that was larger than previously reported, the National Association of Realtors said today in Washington. The decline matched the median forecast of economists surveyed by Bloomberg News.

The Fed's Hoenig said yesterday that borrowing costs are low enough that, when combined with tax rebates passed by Congress, the economy should pick up in the second half, he added.

``The Fed is done lowering rates and may start to raise rates sooner than people expect,'' said Mike Blatt, an Elmira, New York-based asset manager at Chemung Canal Trust Co., which oversees $1.8 billion. ``That'll be supportive for the dollar and impact currency translation earnings for some of the international companies.''

Telephone Shares Retreat

Phone companies in the S&P 500 lost 0.5 percent, the most among 10 industries. AT&T, the biggest in the U.S., fell 1.4 percent to $39, and Verizon, the second-largest, retreated 1.3 percent to $38.38.

Sprint Nextel Corp., the U.S. wireless company that lost more than a million contract customers last year, jumped 36 cents to $9.55. Sprint is combining its planned high-speed wireless network with Clearwire Corp., creating a venture with funding from technology and cable companies.

Intel Corp., Comcast Corp., Time Warner Cable Inc. and Google Inc. will invest $3.2 billion in the new company, Sprint Nextel and Clearwire said in a Business Wire statement.

Walt Disney Co. climbed 60 cents to $34.33. The world's largest theme-park operator said the company's resorts attracted more visitors and second-quarter profit topped analysts' estimates.

Productivity, a measure of efficiency, rose at a 2.2 percent annual rate after a 1.8 percent gain in the fourth quarter, the Labor Department said. Labor costs climbed at a 2.2 percent pace, down from a 2.8 percent increase in the last three months of 2007.